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Summer Budget 2015

I thought it would be useful to publish a summary of the changes announced in the summer budget on 8 July 2015.  As usual, my report is focused on the announcements impacting individuals, families and their businesses.

The Budget proposals may be subject to amendment in the Finance Act. You should contact me before taking any action as a result of the contents of this summary.

This blog is published for the information of clients. It provides only an overview of the main proposals announced by the Chancellor of the Exchequer in his Budget Statement, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this summary can be accepted by the authors or the firm.

When I started writing this, I didn’t think there was much to say, but, as usual, there was quite a lot in there – including some changes not mentioned in the speech, but detailed in the papers released afterwards.

It looks like one man companies will be hit quite hard, with the introduction of a new tax on dividends, and the restriction of the Employment Allowance.  Also hit are people on low incomes with changes to tax credits.

Business Taxes

Corporation tax rate

The corporation tax rate is currently due to be 20% for all companies from April 2016.  It will fall to 19% from 1 April 2017 and then to 18% from 1 April 2020.

Goodwill

A sneaky one hidden in the notes and not mentioned (unless I ‘blinked’ and missed it!) is that there will no longer be a tax deduction allowed for purchased goodwill for limited companies for acquisitions after 8 July.  They stopped the allowance for goodwill from a related party in December 2014, and have extended that to all new goodwill in this Budget.

Employment allowance

The Employment Allowance will increase to £3,000 from April 2016.  However, it will be restricted so that companies where the director is the sole employee will no longer be able to claim.

Capital allowances

The Annual Investment Allowance (‘AIA’), which gives a tax deduction for spending on plant and equipment used in the business, is currently £500,000.  It it was due to return to its old permanent level of £25,000 from 1 January 2016.  It will now been set at a new permanent level of £200,000 from 1 January 2016.

That means that businesses will be able to claim a tax deduction in full for the first £200,000 they spend on equipment within a tax year.

Periods spanning the changeover are subject to transitional relief calculations for the change between rates – take care on this because it doesn’t work in the most logical way!!  Although you can have the whole allowance if you spend the whole amount before 31 December, the amount that you are allowed between 1 January and your year end is restricted to the amount calculated for that period, as follows:

Year end to Dec 2015 From 1 Jan 2016 Total Period from 1 January
December 2015 500,000 500,000
January 2016 458,333 16,667 475,000 16,667
February 2016 416,667 33,333 450,000 33,333
March 2016 375,000 50,000 425,000 50,000
April 2016 333,333 66,667 400,000 66,667
May 2016 291,667 83,333 375,000 83,333
June 2016 250,000 100,000 350,000 100,000
July 2016 208,333 116,667 325,000 116,667
August 2016 166,667 133,333 300,000 133,333
September 2016 125,000 150,000 275,000 150,000
October 2016 83,333 166,667 250,000 166,667
November 2016 41,667 183,333 225,000 183,333
December 2016 200,000 200,000 200,000

So, if you have a March year end and spend £400,000 on qualifying assets over the year.  If that was all before 31 December 2015, all would fall within the AIA.  However, spend the amount after January and only £50,000 would qualify.

IR35 reform

IR35 rears its ugly head again (those affected will know what IR35 is)!  In the supporting documents was the announcement that: “The government will engage with stakeholders this year on how to improve the effectiveness of existing intermediaries legislation (‘IR35’) which is designed to protect against disguised employment. A discussion document will be published after Summer Budget 2015.”

Apprenticeship Levy

The government will introduce a levy on large UK employers to fund the new apprenticeships.

The levy will support all post-16 apprenticeships in England. It will provide funding that each employer can use to meet their individual needs. According to the Chancellor, firms that are committed to training will be able to get back more than they put in.

Minimum Wage

From April 2016, there will be a new National Living Wage.  It will be compulsory for workers over the age of 25, and will start at £7.20 per hour, increasing to £9 by 2020.

Personal tax

Personal allowance

The personal allowance will increase to £11,000 for 2016-7 (ie from 6 April 2016) and to £11,200 for 2017-8.  The higher rate tax threshold (the 40% band) will be £43,000 for 2016-7 and £43,600 for 2017-8.  These amounts are increased from the amounts announced in the March Budget.

The personal allowance will reach £12,500 by the end of this parliament and will, once it has reached that level increase in line with the equivalent of 30 hours a week at the minimum wage.

Dividends

The government will abolish the Dividend Tax Credit from April 2016 and introduce a new Dividend Tax Allowance of £5,000 a year. The new rates of tax on dividend income above the allowance will be 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.

I haven’t been able to find any more details in the Budget supporting publications as yet, but at first glance, it looks like this  is likely to hit those of us operating through our own limited companies quite hard.  For example, if you draw dividends at the level of the 40% band from your company each year, it looks like you will be hit with an extra tax bill of getting on for £2,000.

Landlords

Landlords will no longer be able to deduct all of their finance costs from their property income to arrive at their property profits if they pay tax at the higher rate. They will instead receive a basic rate reduction from their income tax liability for their finance costs.

Landlords will be able to obtain relief as follows:

  • in 2017-18 the deduction from property income (as is currently allowed) will be restricted to 75% of finance costs, with the remaining 25% being available as a basic rate tax reduction.
  • in 2018-19, 50% finance costs deduction and 50% given as a basic rate tax reduction.
  • in 2019-20, 25% finance costs deduction and 75% given as a basic rate tax reduction.
  • from 2020-21 all financing costs incurred by a landlord will be given as a basic rate tax reduction.

Also, not mentioned in the speech, from April 2016, the replace the Wear and Tear Allowance (a deduction of 10% of the rent for landlords of furnished properties) with a new relief that allows all residential landlords to deduct the actual costs of replacing furnishings.

Rent a room

Rent a Room relief, which provides for tax-free income that can be received from renting out a room or rooms in an individual’s only or main residential property, will increase from £4,250 to £7,500 per year from 6 April 2016.

Help to Buy ISAs

Help to Buy ISAs (announced in the March Budget) will be available for first time buyers to start saving into from 1 December 2015. First time buyers will be able to deposit £200 per month into their Help to Buy ISA. First time buyers will be able to open their accounts with an additional one off deposit of £1000 so that they can start saving now.

Flexible ISAs

March Budget 2015 announced that the government would change the ISA rules in the autumn to allow individuals to withdraw and replace money from
their cash ISA in-year without this replacement counting towards their annual ISA subscription limit. It has been announced that the changes will actually commence from 6 April 2016.

Tax credits and benefits

Working age benefits will be frozen for four years.  The freeze will exclude maternity pay and disability benefits.

From April next year, the income threshold at which tax credits start to be reduced will reduce from £6,420 to £3,850, and the withdrawal rate will be increased from 41% to 48%.  The income rise disregard will be reduced from £5,000 to £2,500.

For new claims and those that have a third child after 6 April 2017, tax credit payments will be limited to two children – although provision will be made for exceptional cases, such as multiple births.

The family element of tax credits will also be withdrawn for those starting a family after 6 April 2017.

The benefits cap will be reduced from £26,000 to £23,000.

Child Care

From September 2017 all working parents of 3 and 4 year olds will receive free childcare of up to 30 hours a week.

The tax free childcare account due to start in the Autumn will now  be launched in early 2017, due to a legal challenge.

Pensions

For individuals with income of over £150,000 (including pension contributions) will have the amount that they can pay tax-free into a pension fund reduced at the rate of £1 for every £2 by which their income exceeds £150,000, up to a maximum reduction of £30,000.

The annual limit on contributions is £40,000, so this means it will be reduced to £10,000 for earners with incomes of over £210,000, and tapered between £150,000 and £210,000.

There will also be a consultation on a reform of pensions tax relief as a whole.

Inheritance Tax

The Chancellor announced that a £175,000 allowance would be introduced for passing on the family home on death, meaning that, effectively, the first£1m of a couple’s estate could be passed on free of inheritance tax.  That is not the full story though…..

An additional nil-rate band will be introduced for when a residence is passed on death to a direct descendant. This will be £100,000 in 2017-18, £125,000 in 2018-19, £150,000 in 2019-20, and £175,000 in 2020-21.   It will then increase in line with Consumer Prices Index (CPI) from 2021-22 onwards. Any unused nil-rate band will be able to be transferred to a surviving spouse or civil partner.

The additional nil-rate band will also be available when a person downsizes or ceases to own a home on or after 8 July 2015 and assets of an equivalent value, up to the value of the additional nil-rate band, are passed on death to direct descendants.

There will be a tapered withdrawal of the additional nil-rate band for estates with a net value of more than £2m. This will be at a withdrawal rate of £1 for every £2 over this threshold.

The existing nil-rate band will remain at £325,000 from 2018-19 until the end of 2020-21.

Motoring Costs

The Chancellor announced changes to Vehicle Excise Duty (‘VED’ – that’s Road Tax to you and me!).

There will be no changes to bands for cars registered up to 1 April 2017.  However, from that date, the first year charge will vary with the CO2 emissions of the vehicle (ranging from zero to £2,000).  In subsequent years, a flat Standard Rate (SR) of £140 will apply, except for zero-emission cars for which the SR will be £0. Cars with a list price above £40,000 will attract a supplement of £310 on their SR for the first five years in which a SR is paid.

From the end of the decade, VED receipts will be ring fenced in a road fund to be spent on improving the country’s roads.

It was also announced that the Government will explore the options for extending the time period to the first MOT from 3 years to 4 years.

Insurance Premium Tax

Insurance Premium Tax will increase to from 6% to 9.5% from November 2016.

Student finance

From the 2016-17 academic year, maintenance grants will be replaced with maintenance loans for new students from England, paid back only when their earnings exceed £21,000 a year.

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Budget 2014 – Corporate and Business Tax

Corporation tax rates

As announced previously, the main rate of corporation tax, which generally applies to companies  with profits of more than £1.5 million, will to fall to 21% from 1 April 2014 and 20% from 1 April 2015.

From April 2015, the main rate and small companies rates will be the same and will merge. Until the rates are merged, companies with profits between £300,000 and £1.5 million pay a marginal rate of tax.

Capital allowances

In the Autumn Statement in December 2012, the Annual Investment Allowance (AIA) (the amount that companies can spend on capital equipment and claim a full deduction in that year) was increased to £250,000 (from £25,000) from 1 January 2013 to 31 December 2014.

The Chancellor announced today that the AIA will increase to £500,000 from 1 April (for corporation tax) or 6 April (for income tax) to 31 December 2015, after which it will return to £25,000.

Tax for small unincorporated businesses

As announced in Budget 2012, small unincorporated businesses will be able to use a cash basis for working out their taxable profits for the 2013-14 tax year, so we will now start to see the first accounts being produced on this basis.

Businesses with receipts of less than the VAT registration threshold (which is £79,000 for the 2013-14 tax year and will be £81,000 from 1 April 2014), or twice that if they receive the Universal Credit, will be allowed to join the scheme.  They have to leave the scheme when receipts are more than twice the VAT registration threshold.

Comment: Eligible businesses may benefit from using the cash basis if the amount they are owed by their customers (debtors) plus their stock is generally more than they owe to their suppliers.

This is a timing benefit – there will usually be a one off reduction in profit since they will already have paid tax on the debtors and stock brought forward, but will not have to pay on the debtors and stock carried forward until the next tax year.  Take care though, because the tax will be due at some point – when the business ceases, or receipts go over twice the VAT threshold.

Class 2 National Insurance (NI)

Class 2 National Insurance (paid at a weekly flat rate by the self employed) is currently paid via direct debit or bi-annual bills.

The government is planning to simplify the administrative process of Class 2 NI so that it is collected via the self assessment tax return system, alongside tax and Class 4 NI, with effect from April 2016.